CNBC Power Lunch May 17, 2023

Summary: I spoke with anchors Tyler Mathison and Kelly Evans along with CFR’s David Sacks to evaluate the danger that tensions between the U.S. and China over Taiwan would do major damage to the world economy and markets.  You can see the short video by clicking here or by clicking on the screen shot below. I have pasted the talking points below to give you the full story.

My phone rang early this morning with a CNBC request to appear on Power Lunch today to discuss Elon Musk’s statement in his interview with David Faber interview last night that China taking control of Taiwan appeared inevitable. I never turn down the chance to work with Tyler and Kelly so I knocked out a set of bullet points for the producers and put on a real shirt and tie for the hit. I have copied the talking points I sent to the producers below so you can get more context. As always, I welcome your comments and questions.

Rutledge Talking Points for Power Lunch

Personal note: 20 years ago, I decided the most important question for the lives of my children was whether the US and China learn to live together or go to war. I have always lived according to Chekhov’s Law (“If you want to know about Bulgarians, you have to go to Bulgaria. You can’t just read about them in the newspapers.”) So, I appointed myself Goodwill Ambassador to China, climbed on a plane, and spent much of the next decade meeting people and learning everything I could about China. Among other experiences, I…

• hosted 15 TV anchors and editors (and, I later learned, one North Korean Intelligence agent) at my Beijing apartment for the opening of the Beijing Olympics. (None of them would be able to talk with me, or any other foreigner, in private today.)
• advised or spent time with most of the senior leaders during the Hu Jintao years but did not meet Xi Jinping.
• made countless TV and print interviews and served as Guest Judge for CCTV’s Win in China, a reality show where entrepreneurs submitted business plans competing for Venture Capital.
• served as Chief Advisor for Finance to the Governor of Haidian, home to many of China’s top universities and the lion’s share of startups using venture capital.
• taught students and served as Honorary Professor at the Chinese Academy of Sciences.
• lectured and was appointed Honorary professor at a number of Chinese universities.
• was able to build libraries, kitchens, and playgrounds at many village primary schools across China (supported by my wonderful group of students).
• was given the Great Wall Friendship award by Wang Qishan.
• undertook a fascinating assignment in North Korea that I can’t write about.
• was once very optimistic about the future of China/U.S. relations because I love the young people there.
• lost my optimism when Xi Jinping rose to one-man, authoritarian rule.
• still love the young people there. If we can outlast Xi Jinping until the young people take over, relations will improve dramatically.

Regarding Elon’s interview

• His words (stating the inevitability of China taking control of Taiwan) could have been crafted by the Chinese government. What a tool.
• The real question is, for a guy who talks first and thinks later, what made Elon speak in such slow, measured, short, simple declarative sentences.
• The answer is that he is in the most conflicted situation imaginable.
• Forget his own questionable position on Russia/Ukraine.
• He cannot afford to say anything that would offend Xi Jinping.
• He knows Taiwan is never going to take action against him for anything he says.
• He knows TSMC is never going to take action against him for anything he says.
• He knows Xi Jinping would not hesitate to do so.
• That’s the problem with autocrats.
• When they get upset, bad things happen.
• Everybody knows this, so fear changes their behavior.
• Example: Putin nuclear threats have scared the West out of more aggressive defense of Ukraine. Big mistake.

Regarding Taiwan

• China (PRC) and I were born in the same year 74 years ago.
• China has been saying they want Taiwan back for 74 years—it hasn’t happened yet.
• Why not? At least since Deng Xiaoping, the Chinese government has been run largely as a consensus of the top 100 party members.
• Consensus governments are much less likely to make erratic (dumb) moves, as a simple result of the law of averages (Central Limit Theorem to geeks).
• Consensus government took a longer view and made slower changes than would have happened with an autocratic leader.
• That changed in 2012 with Xi Jinping.
• The big risk is that he thinks in terms of his (relatively brief) lifetime.
• What we really have is Xi Jinping autocrat risk.
• Hopefully we can survive Xi Jinping and a saner form of government resumes in China. Fingers on both hands crossed.

The specter of a Taiwan Takeover 

• What would happen if China tried to seize control over Taiwan.
• Elon is right. Shutting down Taiwan would effectively shut down the modern world economy as we know it.
• The people of Taiwan are not going to be absorbed by the PRC willingly.
• Any military action against Taiwan would/will trigger military response from the US and our allies. An enormous mess would follow.
• Xi Jinping knows this too.
• In probability theory this problem is known as “The Prisoner’s Dilemma.” (The solution: if all players are sane nobody pulls the trigger. If one player is insane they all die.)
• Hopefully knowing the result will keep it from happening. There are no guarantees.
• I am optimistic that common sense will prevail and Taiwan will outlast Xi Jinping. Disclosure: I honestly don’t know whether my optimism is the result of careful thinking or pure denial because I can’t stand thinking about the result.
• I personally have a significant position in TSMC. It is on my Greatest Companies in the World list.
• I will add more if people get more frightened and the price falls.

Looking forward to working with Kelly and Tyler on the show.

END Rutledge Talking Points

Dr. John

The views and opinions expressed in this article are those of Dr. John Rutledge. Assumptions made in the analysis are not reflective of the position of any entity other than Dr. Rutledge’s. The information contained in this document does not constitute a solicitation, offer or recommendation to purchase or sell any particular security or investment product, or to engage in any particular strategy or in any transaction. You should not rely on any information contained herein in making a decision with respect to an investment. You should not construe the contents of this document as legal, business or tax advice and should consult with your own attorney, business advisor and tax advisor as to the legal, business, tax and related matters related hereto.